Energy

SunTrust High-Conviction Energy Picks for Q4 Have Massive Upside Potential

Lee Jackson

Published: October 4, 2019 7:20 am

Last Updated: January 30, 2020 3:03 pm

This year, for the first time in many years, active managers are outperforming index funds, and that should be a loud wake-up call to passive investors. After a more than 10-year bull market, the bull is tired. Although central banks are still providing a liquidity security blanket, and interest rates remain at generational lows, this looks to many on Wall Street like the proverbial “stock pickers” market.

So, many portfolio managers and investors are looking for stocks that can outperform into year’s end and generate a little finish-line alpha. The analysts at SunTrust Robinson Humphrey put together a list of 33 stocks ideas that they feel will outperform into year-end 2019.

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The SunTrust team noted this when discussing the high-conviction equity ideas:

Many of our institutional clients are looking for help as they screen for stocks that are poised to outperform into year end, with characteristics or catalysts that will likely become apparent to the market in the fourth quarter. Furthermore, with the recent increased volatility, partly driven by the “great rotation” – out of momentum/growth into value/ laggard names – we are receiving more requests from money managers for value ideas which have lagged, hence the timeliness of this effort.

Today we look at the energy stocks that the analysts are focused on. Four in the report make good sense for accounts with a degree of risk tolerance, and they are rated Buy at SunTrust.

CenterPoint Energy

This is a high-conviction fourth-quarter selection, the only utility company to make the cut. CenterPoint Energy Inc. (NYSE: CNP) is a diversified public utility holding company headquartered in Houston. Its utility segment provides electric distribution and transmission as well as natural gas distribution services to over 2.4 million electric and 3.4 million natural gas customers.

Besides its utility business, CenterPoint also consists of a competitive natural gas sales and services segment. Moreover, it currently holds 54% of outstanding shares of Enable Midstream Partners.

The analysts noted this in the report:

We believe that positive data points in coming months should address investor concerns regarding the near term earnings outlook for the company, resulting in the elimination of the current 10%-11% P/E multiple discount (based on our 2020-2021 estimates). Discounted valuation, above average dividend yield, strong rate base (and earnings) growth potential, and resolution in coming months of pending issues that have been overhanging the stock, create an attractive total return proposition for investors.

Investors receive a 3.98% dividend. The SunTrust price target on the shares is $32, and the Wall Street consensus target is $31.93. The stock ended trading on Thursday at $28.90 a share.

Continental Resources

This company has a very large exposure to crude oil, so it is a pure-play for investors seeking that. Continental Resources Inc. (NYSE: CLR) is primarily a producer of onshore U.S. oil and has positioned itself in two growing hydrocarbon discoveries in the country: 1) the Bakken oil play in Montana and North Dakota, and 2) the SCOOP/STACK in Oklahoma, giving the company good growth opportunities for years to come.

Many on Wall Street feel that the company’s investment thesis is virtually unmatched. Investors get core Permian-like acreage at a non-Permian valuation. Of greatest importance, Continental is one of few diversified large-cap stocks that offers investors exposure to low-cost oil outside of the Permian. With current capacity and distribution issues in the Permian, this is another solid reason to own shares.

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SunTrust feels Continental isn’t getting a fair shake from some on Wall Street and said why:

We believe the Street is not adequately forecasting upcoming growth and free cash flow driven by its large Bakken and Mid Continent programs. Investors appear to have lumped Continental in with less asset and operational quality explorations and production companies despite the likely strong growth, free-cash-flow, and returns ahead. We believe E&P valuations could re-rate toward year end favoring higher quality companies with strong growth and FCF yield. We believe investors will flock to liquid quality E&P to begin 2020, which should play well into the company’s strengths

Continental Resources shareholders receive just a 0.67% dividend. SunTrust has a $50 price objective, which is near the $49.40 level consensus figure. Shares closed most recently at $29.73.

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Jagged Peak Energy

Shares of this smaller energy company have sizable upside potential from current trading levels. Jagged Peak Energy Inc. (NYSE: JAG) is a Permian Basin oil and gas producer with 70,000 net acres in the Southern Delaware Basin in three operating areas.

Its largest position is held in Whiskey River (35,000 net acres), which is located in Reeves and Ward counties, followed by Big Tex (22,000 net acres), which is located in Pecos County, and Cochise (12,900 net acres), which straddles Ward and Winkler counties.

The stock has lagged this year, but SunTrust feels a turnaround could be imminent:

We believe Jagged Peak has made strides in operating efficiency / well economics lowering costs while boosting volumes post processing of 3D seismic data and further asset delineation. We favor the company’s “baseload” plan of stable growth and development while maintaining a strong balance sheet. We forecast the company’s efficiency improvements to result in a 15% YoY decrease in well costs on a per lateral foot basis. Jagged Peak has ample core inventory for large-scale development even after high-grading its Big Tex position.

The $12 SunTrust price target compares with the $10.32 consensus target and Thursday’s close at $6.88 a share.

PDC Energy

This is another smaller cap name that is somewhat off the radar, but it has tantalizing assets for an acquiring company looking to add growth potential. PDC Energy Inc. (NYSE: PDCE) is a diversified exploration and production outfit with assets in the Rockies and the Permian and Utica shales. The company’s core position is in the Wattenberg, with 100,000 net acres, alongside a recently acquired 55,000 net acre position in the Permian Basin.

The company is targeting 10% to 15% production growth in 2020, and operating progress continues with operating expense improving and well cost declining in the Delaware with longer laterals and modified completion design.

The company made a very solid acquisition recently and the SunTrust report noted this:

PDC Energy recently made what we believe to be the cleanest acquisition in the E&P space in recent memory, combining with SRC Energy. Importantly, in contrast to other mergers and acquisitions in the sector, the company’s acquisition was done entirely with equity, did not include a premium for shareholders of SRC (4% discount to the previous close), and created a nearly perfect proforma acreage position. As a result, the day of the announcement, the stock outperformed the XOP by 17% and was widely heralded by investors as the ideal model for M&A going forward.

SunTrust has set a massive $50 price target. The posted consensus target is $48.48, and shares ended trading at $26.31 on Thursday.

Energy has underperformed this year and could be one of the best sectors to look at for a potential rebound going forward. The SunTrust picks range from very conservative to aggressive, so they offer investors looking to add or increase energy exposure an outstanding set of choices.